The Second International Conference on Food and Agriculture

ISBN : 978-602-14917-9-9

IMPACTS OF RISING STRATEGIC FOOD PRICES ON

POVERTY IN INDONESIA

Ana Arifatus Sa’diyah1, Doppy Roy Nendissa2, Aldon MHP Sinaga3

1
Departement of Agribusiness, University of Tribhuwana Tunggadewi, Jl. Telaga Warna
Tlogomas, Malang 65144, Indonesia /Agriculture Sciences of Doctoral Program, Brawijaya
University
2
Departement of Agribusiness, Faculty of Agriculture, University of Nusa Cendana Kupang,
Indonesia
31
Departement of Agribusiness, University of Tribhuwana Tunggadewi, Jl. Telaga Warna
Tlogomas, Malang 65144, Indonesia

Email: ana.arifatus@unitri.ac.id

Abstract. Poverty has existed for many years, and will always exist in a large number of
countries, so poverty alleviation targets are a challenge for most countries. The main objective
of this research is to analyze the impact of strategic food price increases on poverty with a
systematic measure. The study uses SUSENAS (Indonesian National Socioeconomic Survey)
raw data. The total data used is 287,830 households. consisting of 166,019 rural households
and 121,811 urban households. The impact of price changes on poverty can be seen by using
The HeadCount Ratio, The Poverty Gap Ratio, The Sen Index, and The Foster-Greer and
Thorbecke Index. The analysis showed rice is a strategic food whose price increase has the
biggest impact on increasing poverty, so it needs government efforts to reduce the rate of
increase in rice prices if it wants to reduce poverty.

Key Word: Head Cont Ratio, Poverty Gap Ratio, Sen Index

1. Introduction
Food which includes rice, corn, soybean, beef, shallot, chili, and sugar is a basic requirement for
human life [1]. According to [2] and [3], these seven strategic commodities will determine the success
in realizing the main objectives of agricultural development, namely dynamizing the rural economy,
strengthening food security, and alleviating poverty and improving household economic prosperity.
Poverty is a real picture of the failure of the country's economic development. Poverty has existed for
many years, and will always exist in a large number of countries, so poverty alleviation targets are a
challenge for most countries [4].
Poverty can be distinguished by its definition, namely absolute poverty and relative poverty [5].
There are three measures to calculate poverty, namely the Head-count ratio, the poverty gap ratio and
the severity of poverty [6]. The emergence of poverty often begins with a continuous increase in food

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 The Second International Conference on Food and Agriculture
ISBN : 978-602-14917-9-9

prices. The next increase in food prices causes a decrease in the amount of food consumption. The
decrease in the amount of food consumption due to decreased purchasing power of households
according to [7] is an indication of an increase in poverty. An increase in the price of each strategic
commodity will have two impacts. First, rising prices reduce people's real income, which in turn
increases poverty. Second, the price increase changes in income distribution as a result of different
price increases across individuals depending on their income. As changes in distribution can increase
or decrease poverty, it is the second impact that determines whether price changes are pro-poor or
anti-poor [6].
Several studies on the impact of rising prices on poverty have been conducted by several
researchers, including [8; 9; 10; 11]. However, research that specifically examines the impact of
rising strategic food prices on poverty in Indonesia has never existed. The main objective of this study
is to determine a systematic measure of the impact of rising strategic food prices on poverty.

Material and Methods

2.1 Data
Indonesian data on household incomes and expenditures were obtained from SUSENAS (Indonesian
National Socioeconomic Survey). This data is cross-sectional and it is published by The Central
Statistic Agency of Indonesia. The data is collected from each household for one week by performing
a direct interview. The total data used is 287,830 households. consisting of 166,019 rural households
and 121,811 urban households.

2. 2 Model Selection
BPS (Central Bureau of Statistics) uses the concept of ability to meet basic needs (basic needs
approach) to measure poverty. With this approach, poverty is seen as an inability on the economic side
to meet basic food and non-food needs as measured by expenditure. So poor households are
households that have an average monthly per capita expenditure below the poverty line. The impact of
price changes on poverty is seen by using The HeadCount Ratio in estimating poverty levels, using
The Poverty Gap Ratio in estimating poverty depth, using The Sen Index in estimating poverty
severity and using The Foster-Greer and Thorbecke Index in estimating severity intensity.
The first step is taken before determining poverty levels, poverty depth, poverty severity, and
poverty intensity in determining the poverty line. The poverty line is determined based on the 2016
BPS reference semester one. This determination is based on the use of research data in March 2016.
Furthermore, the poverty line is used to measure (1) the percentage of poverty with a headcount
ratio; (2) depth of poverty with poverty gap; (3) the severity of poverty with severity poverty; and (4)
poverty intensity with foster-Greer and thorbecke index. each equation is described as follows [12;13;
14; 15; 16] :
1. Headcount ratio elasticity
≡ ≡ ............................................................................................................ (1)
Refers to Shepard’s Lemma
= = ........................................................................................................... (2)
= = ....................................................................................................... (3)
2. Poverty gap elasticity
= = − ................................................................................ (4)
3. Sen index elasticity
=∑ = − ................................................................ (5)
4. FGT elasticity
= = − ............................ (6)

38 | Proceedings of The Second International on Food and Agriculture

 The Second International Conference on Food and Agriculture
ISBN : 978-602-14917-9-9

While the effect of price changes on poverty from several elasticities can be written as
follows:
∗ ∗ ∗
∑ = ∑ + ∑ − .......................................... (7)
Then there are several main indices that have been developed by Son & Kakwani, (2009)
which will be used to measure the impact of rising prices on poverty. These are the Price Elasticity of
Poverty, the Price Index for the Poor (PIP) and the Pro-poor Price Index (PPI).
Indeks Harga Keberpihakan Masyarakat Miskin (Pro-poor Price Index)
= ........................................................................................................................... (8)

Price Index for the Poor

∗
λ = ............................................................................................................ (9)

3. Result and Discussion

3.1 Price Elasticity of Poverty
The calculation of price elasticity of poverty (PEP) in urban households is presented in table 1. The
PEP of rice for head count ratio is 1.531, indicating that an increase in rice prices by 1% will increase
the headcount ratio by 1.531 percent. Similarly, if a shallot increase of 1% will increase the headcount
ratio by 0.122%. if the entire price rises by 1% it will increase the headcount ratio by 4.479%.
Table 1. Price Elasticity of Poverty in Urban Households

Commodity
HeadCount (%) Poverty Gap (%) Poverty Severity (%)

FGT Index 7.79 1.19 0.27

Rice 1.531 0.799 1.044
Corn 0.000 0.008 0.010
Beef 0.000 0.001 0.001
Shallot 0.122 0.056 0.071
Chili 0.164 0.076 0.096
Sugar 0.122 0.070 0.088
Other Food 2.204 2.344 2.810
Other Non Food 1.743 2.175 2.642
Total 4.479 5.530 6.762
Source : Author’s Calculated
The analysis shows that an increase in the price of rice by 1% will increase the depth of
poverty by 0.799% and increase the severity of poverty by 1,044%. The results of this analysis
indicate that rice is a very strategic commodity because the impact of rising rice prices is very large on
increasing the severity of poverty in urban households (table 1). This supports the findings [17]
which states that increasing the price of staple foods will increase poverty.
Susenas data on March 2016 shows the average urban household consumption of beef is 0.11
0ns / capita/ day, smaller than the US Department of Agriculture's recommendation of 5.5 ounces for

Proceedings of The Second International on Food and Agriculture | 39

 The Second International Conference on Food and Agriculture
ISBN : 978-602-14917-9-9

women and 5 ounces for men. The low consumption of beef in urban households causes the effect of
price increases to be less visible on the poverty level of urban households.
Table 2. Price Elasticity of Poverty in Rural Household
Commodity
HeadCount (%) Poverty Gap (%) Poverty Severity (%)

FGT Index 14.11 2.74 0.79

Rice 0.754 0.766 0.948
Corn 0.018 0.029 0.040
Beef 0.009 0.001 0.001
Shallot 0.037 0.051 0.061
Chili 0.069 0.065 0.075
Sugar 0.069 0.071 0.087
Other Food 1.044 1.657 1.935
Other Non Food 0.592 1.510 1.766
Total 2.956 4.149 4.913
Source: Author’s Calculated
Table 2 shows the impact of rising rice prices on the percentage of poverty, poverty depth,
and poverty severity for rural households is lower than urban households. As with urban households,
the biggest impact of rising prices on poverty is on the commodity of rice.
The impact of changes in strategic commodity prices for households nationally is almost the
same as urban and rural households (table 3). The increase in rice prices had the greatest impact on
increasing the percentage of poverty, poverty depth, and poverty severity.
Tabel 3. Price Elasticity of Poverty in Indonesia

Commodity HeadCount (%) Poverty Gap (%) Poverty Severity (%)

FGT Index 10.95 1.97 0.53

Rice 1.143 0.782 0.996
Corn 0.009 0.019 0.025
Beef 0.004 0.001 0.001
Shallot 0.08 0.053 0.066
Chili 0.117 0.07 0.086
Sugar 0.096 0.07 0.087
Other Food 1.624 2.001 2.373
Other Non Food 1.168 1.842 2.204
Total 3.718 4.84 5.838
Source: Author’s Calculated
Tables 1, 2, and 3 show the headcount ratio. Poverty gap, Poverty severity, and FGT.
Poverty gap value is 4.84% for Indonesian households, 4.149% for rural households, and 5,530% for
urban households. This ratio shows that the average household food expenditure is 4.84% lower than
the corresponding poverty line compared to household food expenditure in Indonesia as a whole, also,
they show a small portion of food expenditure needed to eradicate poverty. Besides, the resources
needed to move households to or outside the poverty line are higher in rural areas compared to urban
areas.

40 | Proceedings of The Second International on Food and Agriculture

 The Second International Conference on Food and Agriculture
ISBN : 978-602-14917-9-9

Poverty severity, which illustrates the severity of poverty and inequality of expenditure or
income among households in Indonesia, varies from 4,913 for rural households, 5,838 for Indonesian
households to 6,762 for urban households. This shows that the highest inequality is in urban
households.
The three types of poverty index in the form of headcount index, poverty gap index and
poverty severity index are family indexes known as the F-G-T index so that they can be written in the
same formulation. The F-G-T index has a strictly decreasing nature of the poor standard of living, ie
the lower the standard of living owned, the lower the value of this index or the poorer the population.
Another advantage of this measure is that for the three poverty indices, this measure has the nature of
axiomatic monotonicity subgroups [18]. The analysis shows that there is a high intensity of poverty
for Indonesian households, urban households, and rural households. the relative lack of expenditure of
each poor household from the poverty line issued; the FGT index gives greater weight to households
far below the poverty line. the intensity of poverty is more serious among poor households living in
rural areas, and among the FGT index, the FGT index is higher than the cent index in urban areas for
very poor households, however, the penny index is higher in rural areas. According to these figures,
the severity of poverty is a very serious problem in rural areas; on the other hand, income distribution
is uneven among very poor households. but in urban areas, the average income shortfall from the
poverty line for very poor people is very high [5].

3.2 Pro-Poor Price Index

The pro-poor price index helps researchers to understand how changes in prices of each consumption
item will affect income distribution [6]. The pro-poor price index for rice, shallots, chili, sugar, and
other foods is greater than one for all poverty measures. This shows that in urban areas, the increase in
prices of these commodities has a greater impact on the poor than the non-poor. The pro-poor price
index for corn, beef and non-food is smaller than one. This shows that the increase in the prices of
these commodities will relatively reduce income inequality [6]. state that the pro-poor price index
helps us understand how changes in prices of each consumption item will affect the distribution of
income. The pro-poor price index for food from the three poverty measures is greater than one,
indicating an increase in food prices has a greater influence on poor households than non-poor
households.
Tabel 4. Pro-Poor Price Index in Urban Households
Commodity HeadCount Poverty Gap Poverty Severity
Rice 6.594 2.787 2.977
Corn 0.000 0.218 0.219
Beef 0.000 0.009 0.007
Shallot 4.140 1.538 1.589
Chili 3.488 1.310 1.355
Sugar 3.732 1.727 1.787
Other Food 1.342 1.157 1.134
Other Non Food 0.696 0.703 0.698
Total 1.000 1.000 1.000
Sources: Autor’s Calculated
`The results of an analysis of the pro-poor price index for rural households show that rice,
shallots, and sugar are anti-poor commodities because their value is greater than one. This condition
shows that the increase in the price of rice, shallots, and sugar has a greater impact on poor households
compared to non-poor households. While corn and beef are pro-poor commodities (PIP value is
smaller than one).
Tabel 5. Pro-Poor Price Indeks in Rural Households

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 The Second International Conference on Food and Agriculture
ISBN : 978-602-14917-9-9

Commodity HeadCount Poverty Gap Poverty Severity

Rice 2.603 1.884 1.970
Corn 0.313 0.360 0.415
Beef 0.060 0.006 0.005
Shallot 1.251 1.215 1.230
Chili 1.481 0.985 0.966
Sugar 1.662 1.213 1.248
Other Food 0.852 0.963 0.950
Other Non Food 0.445 0.809 0.799
Total 1.000 1.000 1.000
Sources: Author’s Calculated
In urban households, chili is an anti-poor commodity because it will have a worse impact on
poor households, where the increase in chili prices will make poor households worse (increasing the
percentage of poverty). However, when viewed from the depth of poverty and the severity of poverty,
chili is a pro-poor commodity because its poverty gap and poverty severity are less than 1 (table 5).
Tabel 6. Pro-Poor Price Index in Indonesia

Commodity HeadCount Poverty Gap Poverty Severity

Rice 4.598 2.335 2.474
Corn 0.156 0.289 0.317
Beef 0.030 0.007 0.006
Shallot 2.695 1.377 1.409
Chili 2.485 1.148 1.161
Sugar 2.697 1.470 1.518
Other Food 1.097 1.060 1.042
Other Non Food 0.571 0.756 0.749
Total 1.000 1.000 1.000
Sources: Author’s Calculated
Table 6 shows that rice, onion, chili, and sugar are anti-poor commodities and corn and beef
are pro-poor commodities. The increase in the price of rice, shallots, chili, sugar and other foods will
have a greater impact on poor households than non-poor households.

Conclusion and Implication

An increase in strategic food prices will increase the percentage of poverty, the depth of poverty, the
severity of poverty and the intensity of poverty both in rural, urban and in Indonesia in the aggregate.
Of the six strategic foods (rice, corn, beef, onion, chili, and sugar), rice has the biggest impact. So the
policy implication is that if the government wants to reduce poverty then the government must be able
to reduce the rate of increase in the price of rice as a staple food.
Rice, shallots, and sugar are anti-poor commodities both in terms of headcount, poverty gap,
and poverty severity. This means that the increase in the price of rice, onions and sugar will have a
worse impact on increasing poverty for poor households than non-poor households. This finding
enables a direct cash transfer policy for poor households to reduce poverty growth.

Acknowledgment
Acknowledgements are submitted to The Central Statistic Agency of Indonesia which have served the
process of the data purchasing. Acknowledgments are also conveyed to all teams who have helped
data analysis in this study.

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 The Second International Conference on Food and Agriculture
ISBN : 978-602-14917-9-9

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